Jefferies Finds A Reason To Order Papa John's

Papa John's Int'l, Inc. (NASDAQ: PZZA) continues to face uncertainty after a racism scandal that led to its ex-CEO's resignation. In Jefferies' view, investors have an opportunity to profit from the pizza chain's weakness. 

The Analyst

Jefferies' Alexander Slagle upgraded Papa John's from Hold to Buy with a price target lifted from $52 to $58.

The Thesis

Before John "Papa John" Schnatter's use of a racial slur during a sensivity training, the pizza chain had already shown a same-store sales deceleration for six quarters, Slagle said in the upgrade note. (See the analyst's track record here.) 

Same-store sales are likely to fall to negative 5.5 percent in the second quarter, negative 9 percent in the third quarter and remain negative throughout the first half of 2019, the analyst said. Papa John's likely has no option but to lower its 2018 earnings outlook, but the 50-percent decline in the stock since its year-ago highs already factors in an EPS revision from $2.40-$2.60 to as low $1.98 per share, according to Jefferies. 

The chain faces an opportunity to generate value in the stock through a refranchising initiative to a 97-percent franchised model, Slagle said. Otherwise, a leveraged buyout could value the pizza chain between $53 to $64 per share, he said. 

Even if the company remains a standalone entity, it can return to its normalized EPS and EBITDA levels, but this may take three to five years, Slagle said. In that case, Papa John's could earn $4 or more per share by 2022, which warrants a bullish stance on the stock, he said. 

Price Action

Papa John's shares were trading up by more than 1 percent at $42.39 at the time of publication Wednesday. 

Related Links:

Stifel Downgrades Papa John's To Sell Amid 'Fraternal Corporate Culture'

Benzinga's Top Upgrades, Downgrades For July 23, 2018

Photo by Ed!/Wikimedia.